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 “Is the Economy Out of the Woods???”
By Brett Danko, CFP®
It’s the big question on everyone’s mind right now - “Are we on the road to economic recovery?”
The short answer is, I really do not know. No one knows, BUT that doesn’t stop people from thinking they have all the answers (“Often wrong, but NEVER in doubt”, as I like to say).
The economic indicators are starting to look positive in certain areas while other areas lag behind. I do believe we’ve navigated the worst of the economic storm and are out of the path of the financial tsunami that turned our markets upside down 18 months ago. However, we may be in for a long wait before things, whether real or perceived, return to pre-crisis levels. In fact, it may take years before we are truly recovered.
The reasons for my pessimistic stance are outlined below:
1) Consumer Spending
Lack of employment is creating a jobless recovery, particularly among working class families, young adults and teenagers. Consumer spending represents 70% of the economy and Americans are not spending either because they 1) do NOT have the money, 2) are trying to pay down debt or 3) are just trying to save for the future.
Also, the defaulting and variable rate increases of commercial properties and home mortgages will provide a drag to spending in the near term.
2) Federal Government Spending
Government spending is currently helping to prop up the economy, but this type of spending can NOT continue indefinitely. Deficit spending has reached apocalyptic proportions. I realize times of recession call for deficit spending. But, consider this - interest on the debt and entitlement programs (Social Security, Medicare and Medicaid) represent close to the entire amount of REVENUE that the U.S. government receives.
This leaves NO room for defense spending, roads, bridges, national parks, administration, cabinet posts, etc. etc. Congress likes to point fingers at the other political party, but someone needs be the grown-up, take the political heat and propose REAL reform, not just little bits of cost containment around the edges.
The budget need amputations, not minor cosmetic surgery.
My opinion is that IF President Obama wants to take the “hope/change” platform back, he needs to be honest with the American people and tell the truth – WE ARE IN DEEP TROUBLE AND HEAVY SACRIFICE needs to occur from every sector of the economy (no group or industry can be off limits). It may be death politically, but it may be the best thing that could ever happen to the country. If he pulls it off, he could go down as one of the greatest presidents ever. Many pundits say it is impossible to reduce the budget, especially entitlement spending, but isn’t that what true leadership is all about?
3) State Government Spending
State governments also need to cut back. Period. The states have billions of dollars of unfunded pension and medical plans yet no one seems to care. Every year the problem just gets kicked further down the road (similar to the U.S. government). Any governor, progressive or conservative, who successfully navigates fundamental change in their state by requiring sacrifice from all facets of society, will be on the short list of Presidential candidates. As with President Obama, this is a very risky move, but these desperate times call for bold action and true leadership.
4) Lack of Credit
Lack of credit is truly harming our recovery. Most banks, from small community banks to large money center banks, are NOT lending money. I read/hear stories constantly of the unrealistic assumptions that the banks require of borrowers in order to guarantee business and real estate loans. One small business owner said it best –
“the only people that can get a loan are the ones that do NOT need one”.
The larger banks can simply borrow money from the Federal Reserve at very low rates (near 0%) and then buy high grade debt and still make money. It is a cyclical process – the Fed lends money at near 0% and then the banks buy the very debt issued by the government (talk about a symbiotic relationship).
Access to capital is crucial to economic growth as small businesses invest in equipment and more importantly people (i.e. JOBS). The government, state or federal, should NOT and can NOT be the driver of the economy and jobs long term. Private business needs to take that role and without access to capital I do NOT see it happening.
5) The Deficit
I really don’t understand the notion espoused by so many economists that continuous deficit spending is acceptable as long as it remains a certain percentage of the Gross Domestic Product (GDP). Given our entitlement structure, we are headed to a situation similar to Greece.
In a perfect world, you run deficits when times are bad and then pay off the debt and run surpluses when times are good.
However, the U.S. runs LARGE deficits when times are good and runs REALLY LARGE deficits when times are bad. Additionally, as noted before, entitlement programs are eating up nearly all the revenue that comes in to the U.S. Treasury. Both political parties are to blame.
For the record, I didn’t understand how the stock price of internet companies could keep going up while the companies had NO profits in the late 1990s or how housing prices just kept going UP in the mid 2000s. I was told I just didn’t get it. Well, regarding our fiscal deficit, I just don’t understand how we are going to get out of this mess without heroic leadership.
Of course, one solution is to monetize the debt, BUT that is fraught with problems as well. I’ll explore that issue in a future article.
I must apologize for my pessimism – but it is only for the short term.
I do believe America will return to greatness IF we can deal with the fundamental issues discussed throughout this article.
The great United States of America is still the hotbed of capitalism, with a true rule of law and a functioning, though imperfect, democracy. They say it is always darkest before the dawn. Unfortunately, we may be in for some darker and more painful times before our government and citizens truly turn things around.
One bright spot is that America always reacts strongly (and usually successfully) to a severe crisis. We are still the leading power in terms of industrial, financial and military might, BUT we are slipping . . . quickly. I believe we will see discontent that will be motivating and uplifting and will allow someone with great leadership abilities to enact change and save our place as the #1 power in the world.
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